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The first banknotes or paper money

Why was paper money invented in China?

The appearance of paper money dates back to the Song dynasty, in China, in the 11th century. At that time the economy experienced considerable commercial growth, but the use of metallic monies, mainly in bronze, became increasingly burdensome. Transporting large quantities of coins was costly, slow and insecure.

To address this situation, authorities and merchants introduced the first jiaozis, ancestors of banknotes, in the region of the Sichuan. These documents, initially issued by merchants then regulated by the state, allowed the simplification of transactions without handling metal.

The advantages of this paper money were multiple:

• Lighter and easier to carry than metallic coins
• Less vulnerable to theft or loss
• Accepted over long distances between merchants
• Gradually regulated by the imperial authority

However, these banknotes were not backed by fixed metal reserves, which quickly led to high inflation and a loss of confidence in this paper money.

From China to Europe: the journey of an idea

It was via commercial routes, notably the Silk Road, that this Chinese innovation reached Europe. One of the most famous testimonies of this discovery is that of Marco Polo, who visited the court of the Mongol emperor Kublai Khan in the 13th century.

In his Book of the Marvels, Marco Polo describes with fascination a system where «pieces of paper perform the role of gold». For Europeans of that era, this practice seemed almost magical, as it contrasted so strongly with the gold‑and‑silver‑based system.

While the paper money of China aroused interest, it would take several centuries before the idea truly took hold in Europe, as mentalities remained attached to the intrinsic value of precious metals.

First European banknotes: a failed trial?

The first attempt to introduce the banknote in Europe occurred in Sweden, in 1661, when the Bank of Stockholm issued notes to facilitate transactions. These notes, supposedly convertible into metal, met with immediate success.

However, the institution quickly issued more notes than it held in metallic reserves. Lacking sufficient guarantee, confidence collapsed, the bank failed, and Palmstruch was imprisoned. This episode highlighted the importance of strict regulation of monetary issuance.

It would take until the 18th century for the banknote to become firmly established in Europe, with the rise of central banks capable of guaranteeing its value.

The legacy of paper money in the modern economy

The invention of the banknote transformed monetary systems for good. By making transactions more fluid, it facilitated large‑scale commerce. Today, fiat currency (banknotes and coins without intrinsic value) still rests on the same logic: a value guaranteed by confidence in the issuing state.

With the rise of the digital era, the banknote is losing ground, but its legacy remains essential. Bank cards, mobile payments, crypto‑assets: all these innovations continue a story that started in China over a thousand years ago.

Here are the key stages of the banknote’s adoption in the West:

1. 1661: first notes issued in Stockholm (failure)
2. 19th century: distribution with the guarantee of central banks
3. 20th century: generalisation of fiat and scriptural money
4. 4.2 1st century: Emergence of digital currencies

FAQ – The invention of the banknote

Who invented the banknote?

The first banknote was invented in China under the Song dynasty, around the year 994, to replace the heavy metallic coins.

Which European country was the first to use paper money?

Sweden was the first country to issue notes in 1661, but the attempt failed due to a lack of reserves.

Why did the banknote replace gold coins?

Because it is easier to transport, secure and issue in large volumes, while facilitating transactions.